The best thing the IPO class of 2014 has going for it is the IPO class of 2013.
Put simply: performance matters. And strong first-day gains followed by continued strength is what keeps investors interested in unproven new market entrants, and this year’s crop of public debuts has had both in spades.
Not every deal has been a winner, but debuts like social platform Twitter and hotel heavyweight Hilton Worldwide have shined. The average U.S. offering is up 34.6% from its offer price according to research firm Renaissance Capital. More importantly that return has been a mix of an average first-day pop of 17.6% and an average aftermarket return of 15.2%.
While some stocks, like restaurant operators Potbelly and Noodles & Co, had huge first-day pops, there were a fair number of IPOs that debuted below their offering price (26.6% in fact). “There have been some record IPO pops and there are pockets where there is a lot of enthusiasm,” says Renaissance Capital’s Paul Bard, pointing to offerings that include Twitter, which nearly doubled on its debut day, “but it’s limited to a few small groups and at large investors are still being discerning.”
One sector that drew hot money early in 2013 was biotech, but the crossover investors playing for big pops abandoned the sector after mid-year and several deals were postponed or pulled in the fall. In fact, biotech stocks took the crown as the year’s best- and worst-performing IPOs with Insys Therapeutics’ 402% gain and Prosensa’s 63% decline.
It hasn’t been a year of behemoths with only seven billion-dollar offerings, but there have been 222 offerings with an initial market cap of at least $50 million, according to research shop Renaissance Capital, easily the most active year since 2000. The total proceeds of $54.9 billion mark the best year since 2000 as well.
Buy Now: Sony PlaysStation VR In Stock Here
Market watchers expect similar activity levels in the year ahead, but it will largely depend on the continued performance of previous IPOs and whether the broader market continues its march higher.
In 2014, the pace of offerings may well depend more on whether a long-awaited market correction prompts a pause, rather than any slowdown on the supply side.
“There are more companies that are IPO-ready in terms of size and aren’t public than there has been in years,” says Bard.
Many of those companies are sitting in private equity portfolios and Don Lipari, director of private equity services at McGladrey, thinks they will keep coming to market.
“Years of delays and withdrawals due to pricing has created a massive backlog to work through,” he says. “It’s like there was a log in front of a stream; now it’s gone and the water is rushing through.”
The following themes are ones to watch for the IPO Class of 2014.
Return of the blockbuster.
Many investors (and not just those who own Yahoo) are waiting for the market debut of Alibaba, an e-commerce giant that draws comparisons to companies like Amazon.com, Ebay and Google. Alibaba’s offering will almost certainly tip the scales in the billions and it may be the biggest tech IPO ever by valuation. Underwriters are surely licking their chops over the prospect, considering 2013 did not feature any U.S. deals bigger than a few billion and nothing like the $16B Facebook offering of 2012.
Who’s next in social?
A lot of investors had a space carved out in their portfolio for Twitter shares, after already allocating money to the likes of Facebook and LinkedIn. Moving forward the question is whether the demand for social exposure has been satiated. Judging from stock prices of the public players the answer is no, but it remains to be seen if the next crop, like Snapchat, which reportedly turned down a $3 billion offer from Facebook, and Pinterest, will make their way to market.
Will the “smart money” keep selling?
Private equity firms have been ringing the register in 2013, cashing in remaining chips in companies they previously took public – like Apollo’s LyondellBasell stake and KKR selling its remaining Dollar General shares – as well as bringing other buyout alumni to market. Blackstone-backed Hilton had the second-biggest U.S. IPO of the year, raising $2.4 billion in early December, making the investment firm, which did not sell shares in the offering, a tidy paper profit.
Even with the flood of sponsor-backed deals in 2013, there are plenty of other companies sitting in private equity portfolios. That includes long in the tooth deals from companies that were bought before the financial crisis, but also some other buyouts of more recent vintage that might make a quick return to the market to capitalize on lofty valuations. J. Crew, for instance, was only taken private in 2011, but solid retail growth might prove enticing in a market where such stories are hard to come by.
Follow the leader.
Piggybacking on successful offerings in a sector is not uncommon and plenty of business owners will be looking at industry rivals that went public as potential signals for timing. Companies to watch includes PE-backed hotel chain La Quinta, which surely had its eye on the successful 2013 debuts of Extended Stay and Hilton
It’s raining cloud companies.
Dropbox and Box are two names that have been bandied about for several years as prospective IPOs and Bard thinks 2014 is the year. “One or both will go public in 2014,” he predicts. “People like subscription-based enterprise software companies and at this point the business has been proven.” Both companies also made a recent list of pre-IPO tech companies with billion-dollar valuations put together by CB Insights.
Chinese IPOs: back on the map.
China-based companies enjoyed a U.S. bonanza back in 2010, but appetites cooled when a number of deals didn’t live up to the initial hype. After a fallow period the buzz is back though, with successful debuts for the likes of Autohome. Alibaba is the biggest, but surely not the only, Chinese company that may list in the U.S. next year.
The edge among exchanges.
New York Stock Exchange had the upper hand in 2013, with 157 listings raising $57.1 billion to Nasdaq’s 126 listings raising $15.8 billion. Winning Twitter over rival Nasdaq was the biggest coup for the Big Board, which closed its IPO calendar with the Dec. 18 listing of AMC Entertainment. The next high-profile battleground for the pair may come with Alibaba, which has yet to publicly file IPO documents but is expected to list in New York.
Don't Miss: See the first leaked Black Friday 2016 Ad